DSV Panalpina

DSV has come a long way since 11 hauliers in 1976 joined forces and created “De Sammensluttede Vognmænd”. Following the acquisition of the Swiss company Panalpina, DSV has become one of the world’s four largest transport and logistics companies, but the journey is far from over. The integration of Panalpina has proceeded superbly, and the future still bodes for continued growth and a promising potential to improve DSV’s already industry-leading margins.

In many ways, the story of DSV is a unique tale of growth, scalability and focused execution. When 11 hauliers merged their operations in 1976 and took their first step as a single company, the idea was to achieve economies of scale in the daily operations, and parallels can be drawn from that event to the journey DSV is still on today. From 2008 to 2020, which includes the global financial crisis and the Covid-19 pandemic, earnings per share in DSV have grown by more than 13 percent a year through a combination of organic growth and value-creating acquisitions.

DSV has had considerable success with its acquisitions and integration of other transport and logistics companies which has helped shape the company into its present form to a great extent. These acquisitions include Samson Transport in 1997, DFDS Transport in 2000, Frans Maas in 2006, ABX Logistics in 2008, UTi in 2016 and, most recently, Panalpina in 2019, whose size alone was half that of DSV.

By the close of 2020 – a mere 15 months after the acquisition of Panalpina – the integration of the company was complete and the management even realised the 2.3 billion Danish kroner it had announced in cost synergies sooner than expected. These synergies amounted to 25 percent of Panalpina’s expenses and 20 percent of gross profits. DSV’s acquisition of Panalpina was a tremendous success underscoring DSV’s focus on air and sea transport. The company is accordingly the exception that proves the rule regarding our skepticism of acquisitions as a form of value creation.

Air and sea account for roughly 70 percent of DSV’s earnings following its acquisition of Panalpina. DSV is therefore less focused on road transport today and earnings from that business segment account for less than 20 percent of earnings, while the remaining 10 percent comes from Solutions.

While DSV is involved in the freight of almost 3 million container units by sea and 1.7 million tonnes of air freight each year, the key to the company’s value-creating business model is that it does not itself own any significant tangible assets. DSV is also highly – brutally, even – focused on costs. When DSV’s customers need goods transported around the world, transport and logistics companies such as DSV buy capacity from shipping companies such as A.P. Møller-Mærsk or aircraft operators.

By not owning such assets, DSV avoids not only the massive investments in procuring them but also the ongoing maintenance costs of those assets. This contributes greatly to DSV’s attractive return on invested capital, which is over 100 percent excluding goodwill from the many acquisitions throughout the company’s history.

A valued partner

In 2009, a year that hit the transport and logistics industry hard, DSV nevertheless managed to maintain a strong operating income. Earnings for 2009 landed at 1.75 billion Danish kroner compared to a forecasted 2 billion Danish kroner at the start of the year. If such a drop in relation to forecasts is what happens when the economy heads into dire straits, we feel confident in declaring that DSV has a strong and flexible business model.

The Covid-19 pandemic which broke out in early 2020 is a different yet similar example of a global crisis that actually ended up having a positive impact on some transport and logistics companies due to a drop in air freight capacity. Half of global air freight is transported in the cargo holds of passenger aircrafts and with most of them grounded due to a steep drop in travel activity, freight rates took off so drastically that DSV – in spite of lower volumes in air and sea freight – actually realized double-digit growth rates in its operating income during 2020.

Panalpina owned several assets in the form of cargo planes, which DSV had (wisely) planned to sell off prior to the outbreak of the pandemic. However, as air freight capacity suddenly became a very finite resource, DSV demonstrated – despite its size – an impressive degree of flexibility. Instead of selling off those planes, the company began to use these assets which had suddenly become incredibly valuable and profitable to boost its earnings.

We are also impressed by the management’s cost-cutting program amounting to 1.4 billion Danish kroner in savings starting from 2021, which was announced shortly after Covid-19’s global incursion. It is admirable that in parallel with a comprehensive integration process, the company is able to find and implement additional cost-cutting measures amounting to billions of Danish kroner. DSV’s performance throughout 2020 thus underscores the value of a large transport and logistics company with a wide-ranging global freight network and which has the capability and resources to seamlessly transport their customer’s goods from A to B.

Transport and logistics companies are major beneficiaries of global trade and the growing complexity in shipping goods from one continent to another, but it is not only the procurement of cargo space that creates value. Buying cargo space is only a minor part of the service that customers need from DSV.

A significant portion of the payment for a freight forwarder’s services is to ensure that proper documentation is prepared for customs authorities, all the packages are packed correctly with the right papers and so forth. When goods are transported from Asia to Europe, from Africa to Asia or from Africa to Europe and the US, there is a long list of documents and special considerations one must be aware of, and that is an area that DSV is specialized in handling for its customers.

The benefit for the customers is that they do not themselves need to collect quotes from different shipping agents, but can instead delegate that task to DSV, whose employees handle the transport of the goods with a high level of knowledge of the finer details and with greater bargaining power, allowing them to procure the most optimal freight solution. While this is DSV’s core competence, the complexity of global transport is often difficult for individual and smaller customers to grasp.

Currently, DSV has around 56,000 employees and is present in over 80 countries. DSV’s operations fall within the areas of air and sea transport, road transport and its final business pillar, Solutions. Solutions is the only division that is not related to freight forwarding, instead offering a solution where customers can outsource the management of parts of their value chain to DSV. Solutions has more than 600 warehouses, through which DSV – on behalf of the customer – ensures that the right goods are shipped to the right locations as and when needed.

Despite its position as the world’s fourth-largest transport and logistics company, DSV’s global market share amounts to no more than three to four percent. The transport and logistics industry is likely the most fragmented among those our companies operate in, with the 20 largest players only accounting for around 30 to 40 percent of the market, and there is a long list of small (and in some cases, highly localized) businesses among the global total of around 40,000 transport and logistics companies.

The biggest players are gradually gaining market shares from smaller ones, and there has been a degree of consolidation through acquisitions. This was even more evident in 2020 where capacity shortages turned out to be beneficial for the largest transport and logistics companies. With its long history of acquisitions, DSV has been among these consolidating forces.

More meticulous Swiss data

The Swiss company Panalpina was on DSV’s wish list for a long time and became the biggest acquisition in DSV’s history in every sense. Following the acquisition of the US-based transport and logistics company UTi in 2016, DSV’s management stated that further acquisitions were on the agenda, but that they would be focusing on larger, but fewer targets. The acquisition of Panalpina was financed with DSV shares, and we can see why the major shareholder in Panalpina, Ehrnst Göhner Fonden, deemed that to be an attractive proposition.

In the 5 years leading up to 2018, DSV generated a shareholder return of 20 percent per year for its investors, while Panalpina’s annual shareholder return was 0 percent. With its acquisition of Panalpina, DSV continued on its course towards a significantly greater focus on air and sea as Panalpina was particularly active within air freight.

While UTi was operating at a loss and on the verge of bankruptcy, Panalpina was not in a similar tough spot, even though it was nowhere near as profitable as DSV. DSV also had a better opportunity to plan the integration of Panalpina thanks to better data – based on Swiss meticulousness – than was the case with the US-based UTi.

The integration of both UTi and Panalpina was overseen by the head of DSV’s air and sea division, Carsten Trolle, who has been with the company for more than 35 years. Trolle has been responsible for air and sea at DSV since 2015, managing the division with a major focus on customers, lots of energy and a deep understanding of value creation.

Potential earnings growth in DSV’s historical core business: Road

Profit margins are high in air and sea transport, and DSV’s management has been ambitious about the heights the division can reach. In 2020, air and sea achieved a so-called conversion margin of 42 percent, which was an improvement of 6 percentage points compared to 2019. The conversion margin shows how large a share of gross profit ends up as operating income and thus serves as an indication of operational efficiency. It is worth noting that there are no transport and logistics companies anywhere in the world that can keep up with DSV’s conversion margin in this division. Even though DSV is already the world champion in terms of conversion margins, the company’s goal is to reach new heights with the announcement of a new and ambitious 47.5 percent target by 2025 in their 2020 annual report.

Air and sea is a global business in which more than half of gross profits are earned outside of Europe, the Middle East and Africa. More than 25 percent of DSV’s gross profit from air transport stems from its Asian operations, where Jakob Jeppesen is skillfully running a business in robust growth. Jeppesen joined DSV at a young age and has already held several senior roles in the Far East. Around 40 out of 100 tonnes of air freight and half of all sea freight handled by DSV involve parts of Asia.

However, that does not mean that DSV’s initial business area – road transport – has been dumped on the roadside. As mentioned, road transport makes up just under 20 percent of the company’s earnings. The Road division, which deals with road transport (mainly in Europe) has been headed by Søren Schmidt since 2008 with a high degree of commitment. The division does not have the same profitability potential as air and sea but is characterized by considerable value creation due to a negative working capital, which is why the return on invested capital is very high.

We see good opportunities for DSV to increase earnings in its Road division, which could be helped along by the integration of the IT platform Road Way Forward, a process that is scheduled to start in 2021. Once this integration is complete, it will assist the division management team in boosting profitable growth. The management team also appears highly optimistic about the margin potential of this initiative, having stated an ambition to increase the conversion margin from 23 percent in 2020 to over 30 percent in 2025.

The final division in DSV is Solutions, which as mentioned is somewhat special in that its business activities are not focused on arranging transport on behalf of customers. DSV operates more than 600 warehouses through Solutions, in which DSV signs multi-year agreements with customers to take over large or small parts of their value chain.

In practice, DSV helps ensure that their customers’ goods are transported from manufacturing facilities to warehouses and finally to the end market for consumer products, for instance. Solutions can also help drive growth in the remaining divisions in connection with arranging for the freight of goods. Since 2012, Solutions has been headed by Brian Ejsing, who previously helped solve DSV’s challenges in Germany and the Netherlands. DSV also has a goal to increase the conversion margin of its Solutions division from the current level of 22 percent to over 30 percent by 2025.

The strategy up to 2025 thus reflects a company that is as ambitious as ever, with a target to increase the group-wide conversion margin to over 40 percent and the return on invested capital (including acquisition-related goodwill) to over 20 percent, compared to its 2020 level of 14 percent.

Strong, long-term management culture with considerable length of service

The division managers have been in their positions for a long time, and the same is true for the executives, where we find Jens Bjørn Andersen as the CEO and Jens Lund as the CFO. Andersen joined DSV in connection with the company’s acquisition of Samson Transport in 1997 and has been working at Samson and later DSV since 1988, taking over as CEO in 2008. Jens Lund has occupied the CFO position since 2002 and is also heavily involved in the company’s IT operations. Lund has demonstrated a constant and unwavering focus on keeping unnecessary costs to a minimum as well as optimising working capital and the company’s IT infrastructure.

DSV invests heavily in developing its IT systems. The company has more than 1,300 employees working in that area, and DSV’s annual investments in IT development amount to more than 1.5 billion Danish kroner. DSV’s investments are aimed at creating efficiency gains so that volumes and earnings can grow faster than the number of employees. Accordingly, these investments constitute a major impetus in the management’s ambitious conversion margin target.

DSV’s IT systems are not solely used to make collaboration with customers and suppliers more efficient, however. The systems also serve as a tool to monitor customer relationships, using reliable AI to flag indications of dissatisfied customers and thereby allow them to take action to retain (profitable) customers.

When Andersen became CEO in 2008, he took over from Kurt Larsen, who continued as chairman of the board. He occupied that post until 2019, and we believe it has been an exceptionally great example of the fact that companies should not blindly follow the checklists for “sound business management”, which often recommend against allowing a CEO to move into the role of chairman of the board.

In companies with the right long-term mindset and a healthy, value-focused corporate culture, there can be benefits to retaining leading forces on the board, even if they used to be CEOs. DSV’s board includes the vice-chairman, Jørgen Møller, who headed the air and sea division for 14 years up to 2015 with considerable success. The chairman of the board, Thomas Plenborg, took over from Kurt Larsen in 2019.

The results achieved under Larsen’s time as both CEO and chairman of the board of DSV have been nothing short of impressive. Throughout that period, DSV achieved exceptional value creation, a market value which in 2019 exceeded that of A.P. Møller Mærsk and a string of well-executed acquisitions and integrations that has propelled the company into its position as one of the world’s largest transport and logistics companies.

Nothing short of a fairy tale

DSV’s share price growth has been approximately 23 percent a year for the past 20 years. DSV, once something of an ugly duckling, has now grown into a beautiful swan a la Hans Christian Andersen’s fairy tale.

As long-term co-owners, we have valued the company’s long-term management approach, and we feel confident that DSV will retain its corporate culture and values, which is also why the company has been part of BLS Invest’s portfolio since we were established in 2008.

Acquiring companies with an aim to optimizing their operations is a discipline in which DSV is almost unrivalled. However, there are risks involved in acquisitions, which also require major resources from the entire organization. It is therefore essential for the management to closely assess when the potential outweighs the risk, and there will also be a period during the integration where the employees’ focus is not entirely on promoting organic growth. We remain highly confident that DSV’s management is solely driven by furthering long-term financial value creation, as demonstrated throughout 2020 thanks to their willingness and ability to execute large-scale cost-cutting programs in parallel with the biggest company integration in DSV’s history.

A change in financial reporting rules on how to recognize leasing agreements has caused considerable disruptions in DSV’s financial reports and creates disruptions in assessments of the company’s development, both in isolation and in comparison to its competitors.

This is because the recognition of leasing agreements contains a large proportion of managerial estimates. One thing that has eased access to – and the cost of – raising capital in this regard is DSV’s robust credit ratings of A – from S&P Global and A3 from Moody’s, both of which are companies in our portfolio and mentioned in this book. These two credit ratings are among the highest a company can attain, reflecting DSV’s financial strength and flexibility.

All earnings in a well-run transport and logistics company like DSV become free cash flow, and in 2021, DSV is expected to achieve a free cash flow of around 9 billion Danish kroner, corresponding to 3.5 percent of its market value.

DSV has displayed considerable discipline in its allocation of free cash flow, going first to keep debt within their target level of under two years’ EBITDA. If the company’s debt lies within that level, the management will attempt to identify interesting investments in business-promoting initiatives, which could include acquisitions.

Surplus cash flow is thereafter distributed to shareholders, which in 2020 resulted in a dividend of DKK 4 per share, corresponding to a dividend yield of below 0.5 percent of DSV’s market value, and share repurchases of around 5 billion Danish kroner, corresponding to just under 2 percent of the company’s market value. In other words, DSV’s management prefers to distribute its excess capital to shareholders via large share repurchases, which we also expect will be a priority in 2021. With a boost in capacity following the integration of Panalpina and a healthy debt level in the low end of the management’s desired range, DSV should therefore be able to repurchase shares for around 7 billion Danish kroner in 2021, corresponding to around 3 percent of its market value.

Even though 45 years have passed since the 11 hauliers banded together to start DSV, it is difficult to imagine that even the most visionary among them had dared to dream that DSV would ever become what it is today. Despite the company’s many years of success upon success, we see no indications of a management team that’s resting on its laurels; DSV appears determined to achieve organic growth following the successful integration of Panalpina while also preparing for additional value-creation acquisition opportunities within the industry.

In other words, DSV’s journey – by land, sea and air – is far from over.